HBS Cases: iPads, Kindles, and the Close of a Chapter in Book Publishing

by
Julia Hanna

Book publishing is changing before our very eyes, even if the industry itself is fighting the transition with every comma it can muster. Harvard Business School professor Peter Olson, former CEO of Random House, wonders if books themselves may be in jeopardy. Key concepts include:

The traditional book publishing and distribution system is under pressure to change to digital e-books.

Publishers should consider a strategy of cooperation rather than competition with online retailers.

Adding video and other multimedia capabilities will make e-books more attractive in the textbook industry.

The fundamental question to be asked in the Internet age is, how popular will books remain?

Two days ago, the first buyers of Apple's iPad began putting it through its paces, playing games, navigating the Internet, and downloading electronic books.

That groan you heard was from dozens of book publishers across the United States, reeling from yet another onslaught against their bread and butter: the paper book. First it was Books on Tape, followed by books on phones, and then the king of business model killers, Amazon.com's Kindle.

“Traditional trade book publishers are scared.”

Now the iPad, with its magnificent color display, glitzy "bookshelves," and easy-to-use interface, is poised to take another bite out of the hearts (and profits) of companies from Doubleday to Putnam.

"Traditional trade book publishers are scared," says Harvard Business School professor Peter Olson. "The world that they have known, of print books and brick-and-mortar bookstores—the whole physical distribution system—is on the cusp of changing fundamentally."

Olson has a particularly informed view of the issue. Before arriving at HBS in 2008, he was CEO of Random House. In a recent unpublished case study, "The Random House Response to the Kindle," Olson and professor Bharat Anand give students an introduction to the book publishing business and the emerging landscape of e-readers before presenting them with the conundrums that face Random House CEO Markus Dohle (Dohle succeeded Olson in 2008):

Should the company pursue a policy of confrontation or cooperation with Amazon? Are there other strategic partners to consider?

As the largest publisher in the world, should Random House take a stand on e-book pricing and royalty rates?

Finally, if the entire structure of the book publishing industry is changing, what role will Random House play in the future?

Olson has some thoughts—but no easy answers—to those questions.

What About The Customer?

E-book pricing is one of the biggest sources of friction. In a recent dustup between Amazon and Macmillan, the online retailer briefly removed the publisher's Kindle editions and print books from its site after Macmillan indicated it would begin setting higher consumer prices for e-books than Amazon's standard charge of $9.99 for new releases. Amazon capitulated after a few days: Under Macmillan's new terms, the publisher will set the consumer price of each book, and Amazon will take a 30 percent commission on every sale. (E-book editions of most new fiction and nonfiction releases will cost between $12.99 and $14.99.)

"Publishers are worried that more and more customers are going to get used to the sort of cheap prices that will undercut print books," Olson says. "As with other media products, there's the perception that all things digital should be less expensive, or free. So I think this most recent skirmish has resulted in a truce at most."

"The odd thing is that no one is really focusing on the reader. A disproportionate amount of publishers' resources are dedicated to the manufacturing and physical distribution of books, when in fact their key function is editorial in nature. In a sense, many book publishers are trying to buy time, to postpone a reckoning with reality."

Instead of making books more accessible and attractive, publishers are attempting to prop up the print book business by upping the price of e-books, Olson says. Some companies even hope to introduce parallel pricing by selling e-books at the same price as the edition (hardcover, paperback) currently on the market.

"I don't know of many successful examples of pricing a product based not on what it costs or what people want to pay for it, but based on another format that is completely different, just because you want to keep that format alive," he remarks.

So the ongoing power struggle between publishers and key online retailers like Amazon remains an open question. For his part, Olson endorses a strategy of cooperation over confrontation. Macmillan may have won the pricing war, but what have they lost? After all, Amazon can retaliate by promoting other publishers' titles more.

"I don't understand what you're winning in the pricing war," Olson says. "It's really only an advantage if you think each e-book cannibalizes print book sales. If you don't believe e-books grow readership at all, then Macmillan's push-up-the-price strategy is more understandable."

Surprise Ending?

The industry may have bigger problems than how much to charge for a title. Less than half of all American adults ever read a book after leaving school. Most of the remainder read, at most, only one or two books a year. Industry estimates indicate that somewhere between 15 and 25 percent of the population purchase books on a somewhat regular basis.

So with competition for eyeballs increasing from the Internet, television, and video games, publishers know they have a tough road ahead, regardless of how digital readers change their business model.

"I think the fundamental issue is not the rate of adoption of the e-reader, or whether publishers will survive in their current form, or what their role will be in the future," Olson comments. "The fundamental question at the very bottom of this is, will people read books at all?"

The textbook market is another potential target for e-book disruption, especially as new devices such as the iPad add video and other immersive technologies to the mix.

"If we as a society are concerned about the next generation acquiring knowledge and skills, the e-reader offers tremendous potential to bridge the gap that a lot of young people experience between a very exciting digital reality and the dead world of the textbook."

On an emotional level, the death of the paper textbook will carry less societal angst than trade books, he adds. "We're not generally attached to our textbooks. If they go, nobody but the textbook publishers will cry."

Disruption Happens

The Random House-Kindle case, recently taught in the first-year Strategy course at HBS, prompted some interesting conversations in the classroom, Olson says. Students were excited to discuss an ambiguous situation that is unfolding day by day.

"One thought they proposed that seems well worth pursuing is the idea of bundling the e-book and print book together," he says. "After all, why should they be viewed as adversaries? Why not offer both and see if you can make the market more attractive, with additional features like a video interview with the author? An e-book can be a much richer and deeper experience than anything we've seen before."

Students were also intrigued by the concept of dynamic pricing, or charging varying amounts based on how many "extras" are packaged with an e-book. Another discussion topic was the difficulty of downsizing the print publishing side of the business while simultaneously forging a new strategy for e-book publishing.

"The situation is fraught with complications," Olson says. "It's a mess. It's wonderful."

And as a former book publishing executive, Olson recognizes that his outlook might be a bit less cheerful if he was reporting to the company's head office in Gütersloh, Germany.

"It's a very nice time to be at HBS and not in the book industry. It's fun to watch, but it's probably not as much fun to be in the middle of this."